December 26, 2013

Depending upon your assets, intended beneficiaries, or your own situation, a trust might be a better option to accomplish your preferred distribution scheme than a will. A trust is a document with three major players: the person who creates it (you), the trustee (who could be you and/or others) and the beneficiaries (who could be you and/or others). It provides an instruction manual as to how you want your assets (and debt) addressed. It is especially useful if there are minor beneficiaries and you want to know that instructions are followed long-term, or where another needs some long-term financial assistance or management (such as a special or supplementary needs trust.)

Beneficiary Designations:

Confirm that beneficiary designations on your various accounts remain current and in line with your overall estate plan. Types of assets that frequently carry opportunities for beneficiary designations include: insurance, annuity, and retirement accounts, and/or some brokerage accounts (accounts that hold securities and other investments). The benefits to such designations are to completely avoid probate, and there may be some income tax advantages to naming a beneficiary directly, rather than your estate or trust. Keep in mind that the individuals or entities named on the beneficiary designation are the recipients where the assets will be paid. If your estate plan is premised on having assets go through your probate estate, and therefore directed to be distributed through your will, but the beneficiary designation is not changed to be consistent with that approach, your plan will be defeated.

If you are divorced and intend for your ex-spouse to receive assets via a beneficiary designation that has not been changed since the divorce, revisit the designation. Under the MUPC, divorce effectively revokes certain beneficiary designations to a prior spouse. You may need to take affirmative steps to insure that the designation will be upheld by renewing it post-divorce.

October 02, 2013

Many of you remember
when interest rates on your certificates of deposit (CDs) were earning anywhere
from 10-15% annually. Well, with the use of some charitable giving techniques, you
may be able to convert a significant amount of your wealth into income
producing assets, as substantially higher rates may be obtained than those
possible through more traditional vehicles, such as a CD or savings account.

One tactic is to
establish what is known as a charitable lead trust. With this type of trust,
assets are placed in it, and you will receive a charitable deduction for a
portion of the funds contributed or donated, since it has a charitable purpose.
This would become significantly attractive for stocks that have a substantial increase
in value since purchase. In this situation, the charity will receive a rate of
return that you set, and all involved will hope that the rate of return
actually recognized by the trust will be greater than the amount paid out. Income
received by the charity during the your lifetime, as the donor, or for a period
of years, will be set at the initiation of the trust, but all remainder amounts
left when the trust terminates will pass your (donor’s) family, be it children,
grandchildren, etc. When the funds are distributed, they are basically tax free
to the recipients.

A similar trust is a
charitable remainder trust. Here, appreciated assets are contributed to the trust,
and when sold, some capital gains are recognized, but you will receive a
charitable deduction on your tax return for a portion of the funds contributed.
In this case, the income from the trust is recognized by you (the individual
donor) or your family during lifetime, and the remainder passes to charity.

Based on the current
allowable rates by the Internal Revenue Service, you are entitled to receive a
rate of return based on your age, and this ranges from approximately 6% for a
person in their 60s to over 9% for a person in their 80s. In some cases, there
may not be sufficient income to pay the funds out to the charity when the trust
is to terminate, and therefore, so long as the “testing” of the amounts passes
for IRS purposes, the trust is allowable and may pay less money to the charity
at the termination, but distribute more money to the family on a tax free, or at
least, a lower tax bracket than otherwise would have been taxed.

A similar opportunity is available, provided by many charities, known as
a charitable gift annuity. This is very similar to a charitable remainder trust,
although there is no trust established, but merely a relatively straightforward
document where you can give money to a charity, and in return receive an
annuity for a certain period of time, or possibly throughout your lifetime.
Again, you will receive a payment based on your age, (and the interest rate for
an older person is greater than that of a younger person) and in most cases,
the money returned to you will be substantially greater than what you could
receive from a CD, money market account, or a similar asset that does not
fluctuate with the market. Some people determine that they really don’t need
the income from time to time, and they gift it to the charity, thus allowing a
larger income tax deduction for that year.

Most national charitable
organizations, such as the American Cancer Society, American Heart Association,
and most colleges, universities, and hospitals have planned giving officers who
would be pleased to assist with the preparation of this type of gift. Most also
have software that will calculate the income tax consequences of making a gift
as well as the estate and gift consequences if the you request that
information. With the gift annuity, it is usually not necessary for you to obtain
legal and accounting assistance, but in most cases, professional should be
consulted ensure that the proposal is in the your best interests and that the
appropriate assets are being contributed to the gift annuity.

July 10, 2013

Sometimes people want to
leave funds to their children, but they are concerned that their kids may not
be responsible enough to manage them. Other parents or grandparents wish to
ensure that inherited funds will not change the lives of the beneficiaries such
that they will become “lazy” and not have the same work ethic as the older
generation.

To address this concern, funds
are often distributed at certain ages, such as 1/3 at age 30, 1/3 at age 35,
and 1/3 at age 40. For other families, where the children are already somewhat
older, but perhaps the parent is not fond of the in-laws, the funds can be
distributed at intervals such as 1/2 upon the death of the parent and 1/2 five
years later, but not exceeding a date later than the child’s attaining the age
of sixty-five.

Some parents and grandparents
are concerned about education, moral and family values, business and vocational
choices, and charitable and religious opportunities. In these types of
situations, a person may want to establish what is known as an incentive trust
that allows the grantor of the trust to reward heirs for their desired
behavior. There may also be penalties imposed for undesirable activities.

These trusts may be used to
provide extra support to the heirs who pursue advanced degrees or focus on
family life by providing income for the family so that both parents will not
have to work, and at least one may stay home raising the children until the
children attain a particular age. There may also be a trust to provide funds to
the heirs who are committed to maintaining the family business, and additional
financial support may be provided to those beneficiaries who work in a field
that is not as lucrative as others such as social service, teaching, etc.

Finally, some family members
may wish to encourage behavior by requiring specific observances such as
religious or charitable opportunities, so that if a person is involved in a
particular cause, such as being a missionary, the trust fund will provide them
with additional support for themselves and their families without having to
worry about requesting additional funds from the trustee on a periodic basis.

When setting up an incentive
trust, it is very important to be sure that the trustee is aware of the
intentions of the grantor, and therefore possibly should be given specific
authority within the trust and possibly even a letter of intent from the donor
as to when and how much funds shall be distributed, in addition to the usual
provisions such as having all income distributed with principal at the
discretion of the trustee. It is also important to be sure that one does not
violate any constitutional or public policy law or standard that would cause
the trust to be violative of a statue or regulation.

In short, it is easy to
discuss the establishment of an incentive trust, but there are significant and
complex legal, tax, and investment issues that will also arise when creating
this type of document. It is certainly not for everyone, and it should be used
only in those situations where other types of trusts or investment vehicles may
not be appropriate.

June 26, 2013

While most requests to a trustee of a special needs trust
are probably going to be appropriate, such as payment of unreimbursed medical
expenses, clothing, furnishings, etc., there are several areas that are always
potentially problematic for both the beneficiary and the trustee.

The trustee must make a decision whether the expenditure is
not only appropriate, but whether it is going to be one that must be reported
to the Social Security Administration if the beneficiary of the trust is
receiving governmental benefits such as Supplemental Security Income (SSI). If
so, then the amount that is used must be reported, and this could have the
effect of reducing the next monthly payment.

One of the problem areas is the purchase of a vehicle. The
mere purchase of a car is probably not going to be acceptable if it is not for
the sole benefit of the individual, as others could be using it for themselves,
and it is the case in many situations that the beneficiary will not be driving
the vehicle.

However, the purchase of a van could be a considerable
expense, especially if the van needs to be handicap-equipped with a lift and
other necessary features that allow the beneficiary to utilize it. The purchase
must usually be qualified to enhance the quality of life of the individual, but
the trustee must determine whether it is prudent to use the funds of the trust
for this purchase.

One of the major issues at the time of the request for the
van purchase is the amount of money in the trust and the value or cost of the
van. If the van is likely to consume a considerable percentage of the value of
the trust, then it may not be an appropriate purchase. Perhaps there are
options, such as obtaining a used van or paying for transportation when
necessary, be it cab fare, vans, or other forms of transportation for the beneficiary.

Of course, in addition to the cost of the purchase of the van,
there are also added costs, such as tax, insurance, maintenance, gasoline, and
repairs if the car is not under warranty. In some cases, it may not be
appropriate for the trust to own the car, but perhaps it should be owned by a
family member, with the trust being the lien holder, such that the person
owning the vehicle is borrowing money from the trust to pay for the vehicle.

Another hot topic has been the use of trust funds for travel
for non-beneficiaries. The Social Security Administration issued a revised Program
Operation Manual (POM) that stated that some trusts would not be permitted to
pay for travel expenses incurred by non-beneficiaries. This is a problematic
area since some disabled beneficiaries would not be able to make trips, take
vacations, or travel to visit other relatives without having at least one paid
companion to be with them at all times. Therefore, the revised regulation
stated that the expenditure will not violate the so-called sole benefit rule if
used by third parties for goods and services received by the beneficiary,
payment of third party travel, “which is necessary in order for the trust
beneficiary to obtain medical treatment,” or payments that allow a third party
to “visit a trust beneficiary who resides in an institution, nursing home, or
other long-term care facility (e.g., group homes and assisted living
facilities) or other supported living arrangement in which a non-family member
or entity is being paid to provide or oversee the individual’s living
arrangement.”

This basically means that the travel must be for the purpose
of ensuring the safety and/or medical well-being of the individual.

There are several areas that still remain to be clarified,
such as what is reasonable compensation for the expenditures of the beneficiary
and/or family. There is also a “reasonable” test, such as what compensation is
reasonable to be paid to the trustee to manage the trust, as well as other
“reasonable fees and costs for investment, legal, accounting, and other
services for the beneficiary.”

One must keep in mind that the trust has been established to
create an exception so that the beneficiary continues to qualify for all
governmental benefits, and the trustee does not want to run afoul of the rules,
which are known as the “sole benefit” rules, which means that the funds in the
trust must be used only for the benefit of the primary beneficiary, without the
regard for the remaindermen.

Nevertheless, in these first party trusts, which have been
created with the money of the beneficiary so that the beneficiary continues to
qualify for governmental benefits, there is a payback to the state for the
amount paid by the state for the care of the individual, so the government wants
to be sure that the funds are being spent prudently and not frivolously or
otherwise, which could possibly reduce the payback amount.

February 27, 2013

The modern family of today is often a
mix of spouses, exes, kids, and steps who somehow find a way to make it all
work. Estate planning for such an intricate blended family may be a little
tricky, and there are lots of factors to consider.

While traditional estate planning
documents are critical, it is also important to consider a prenuptial or a
cohabitation agreement. Either one of these agreements should spell out, in as
much detail as possible, what will occur if the relationship dissolves,
regardless of whether or not the couple is married.

One of the major issues that this
agreement should address is housing. When a couple purchases or rents a home
together, if the relationship falls apart, and both parties are liable on a
mortgage, what will happen?

Additional life insurance may be
necessary if one of the parties is under an order of the court from a prior
divorce decree wherein a percentage of assets is required to be maintained for
the benefit of children from the prior marriage.

It is also important to consider each
party’s health proxy and durable power of attorney. Who will be in charge of
making decisions in the unfortunate event that one individual becomes
incapacitated?

A will and possibly a trust should also
be considered, and provisions within these documents should fairly closely
mirror the prenuptial agreement to conform with all of the requirements set
forth in that agreement, which may be construed to be a legal contract.

In addition, if there are any
requirements under an order of the court from a prior divorce decree, those
provisions should also be reviewed and included within one’s will.

When assets of relatively equal value
are owned, some couples choose to retain their own assets in the event of a
divorce, however, in the event of a death, some additional assets would be left
to the survivor. Other options may include a possible phasing in of assets.

Health insurance should also be
considered prior to marriage. Both parties may be receiving health insurance from
a former spouse. The previous divorce decree, any modifications, and separation
agreement should be reviewed carefully ensure that all benefits are maintained
or solutions may be implemented.

The issue of life insurance and
qualified plans such as 401(k)s, IRAs, 403(b)s, etc. should also be reviewed.
It is very important to understand that such assets pass by beneficiary, not by
will. Therefore, whoever is named as the beneficiary of these assets will
receive them without the need of having those assets pass through probate.

Likewise, if assets are intended to
pass to a trust or to individuals listed in a will, it is important to obtain
change of beneficiary forms and have them signed and forwarded to the plan
administrators at insurance companies when the documents are signed.

The bottom line is that there are many
important considerations and decisions to make before remarrying or moving in
with another person.

February 12, 2013

Every once in awhile, there is a case that is worthy of writing
about to help our clients understand their rights and obligations.

In some legal documents, lawyers include language known as a
no contest clause or an in terrorem clause. This helps to prevent individuals
from contesting wills and trusts, and in many states, these are held to be
valid so that if a person does contest, they forfeit and lose their rights
under the trust or will. In some states, however, these clauses are not valid,
and in some instances, they are valid only if the objector to the will or trust
is successful.

A recent case in New Hampshire involves a significant estate,
(over $100,000,000,) where the decedent left funds in trust. The trustees had
the obligation to invest the funds and make distributions, but at one point,
some of the beneficiaries objected to many of the decisions of the trustees,
but they ultimately resolved the matter by a mutually agreeable settlement
which was filed with the court.

A few months later, one of the disgruntled beneficiaries,
who still was not happy, proceeded to bring an action against the trust,
attempting to remove the trustees, sue for breach of fiduciary duty, and made
other allegations and complaints in her capacity as a beneficiary.

This trust contained a no contest clause, and one of the
affirmative defenses and arguments of the defendant trustees was basically that
the plaintiff beneficiary would forfeit her share if she contested. After many
weeks of hearings with many witnesses, including many nationally recognized
legal scholars who testified, the court, in a 50+ page decision, decided that
the plaintiff did not have a case and enforced the no contest clause.

The plaintiff in this case was not only prohibited from
receiving any further distributions based on the in terrorem clause affirmation
by the court, but she was also ordered to reimburse the trust for all of the
distributions made to her from the date of the filing of her action, as well as
pay all of her own legal fees and costs, which were apparently in the hundreds
of thousands of dollars.

It is important, therefore, to be sure that before contesting
any case, you read all of the language of all documents, including any
amendments or codicils, to determine whether there is the no contest clause. If
so, you must make a difficult decision whether to proceed and gamble away your
rights in your attempt to void the document, because if you are not successful,
the net effects will likely be financially devastating.

Not only did the above plaintiff lose the case, but she had
to repay funds received as well as pay all her own costs and expenses. She is
now removed as a beneficiary from this trust, thus providing the other
beneficiaries with significantly more money.

As unhappy as she may have been with the prior trustees, and
for whatever other reasons she brought the action, she certainly would have
been better off merely maintaining her status quo as an unhappy beneficiary.

June 01, 2012

While married individuals have plenty of benefits and options available to preserve their assets, while also securing Medicaid eligibility, a single person may not have quite the same opportunities. This is true because a married couple’s assets are counted in total when determining the assets available for expenditure on long-term care. A single person’s income is countable towards long-term care expenses, except for an allowance for medical insurance and $72.80 per month for a personal needs allowance.

Even a Prenuptial Agreement will not hold up to protect a couple’s assets in the unfortunate event that one spouse becomes incapacitated and needs long-term nursing home care.

So what should one do? Divorce?

Well, that is one option, and Attorney Darling appeared on the Today Show regarding this topic. But there are other options. Unfortunately, the choices are not optimal, since you will have to part with your assets irrevocably five years before you become ill. This means that your assets have to be either gifted or transferred to a trust. You may also transfer your house to your children, with or without the right to live in it, (called a life estate,) or you may consider purchasing long-term care insurance.

The previous law included a three-year waiting period, but that changed in February of 2006, so any transfers made prior to that time are “grandfathered in” under the prior rule, where the waiting period would exempt those assets.

In any event, it is not an easy decision to transfer assets outright, without future use of them, and it is also important to comply with the rules, since there is not much gray area in this process. In order to comply with the exceptions to the rules, the regulations must be followed carefully and strictly. Mistakes are often not forgiven and very difficult to fix when there is a crisis situation.

Anyone dealing with these issues should not rely on advice given to them by their friends, neighbors, or other individuals, but should seek the counsel of a qualified elder law attorney. That is the only way to assure that you are making the correct decisions.

May 16, 2012

Until recently, if you entered a long-term care facility and wanted to apply for MassHealth, you would have to purchase a commercially offered annuity in order to qualify for Masshealth sooner than if you expended all of your own funds first.

Of course, if you are single, the annuity would have to be based on specific charts and tables issued by the social security administration and approved by MassHealth, and the income from the annuity would also have to be spent on your long-term care. The Commonwealth would also have to be the named beneficiary on the annuity in order to reimburse the state upon your demise, up to value of services provided by MA.

If you are married, then your at home spouse (community spouse) would be able to receive income from the annuity and not have to utilize those funds for your care in an institution.

As the commercial annuity may not pay a rate of return that was commensurate with what you want to receive, and due to the fact that it may not have been obtainable in a relatively short period of time, it is no longer as attractive as used to be. Many insurance companies no longer write short-term annuities that comply with the regulations of the Medicaid authorities, and it is increasingly difficult to find highly rated companies that sell these qualifying annuities.

In the past, a private annuity was available for you to transfer assets to your children, who would then sign an agreement promising to pay the annuity amount to you for whatever period of years was appropriate in your particular case. The Medicaid authorities have basically shut down the opportunity to use private annuities, as they claim that the funds held by children may not be protected from lawsuits, divorces, etc., and therefore, the annuity was not as “commercially sound” as an annuity sold by a licensed insurance company.

However, a recent case has changed the landscape of annuities, and now private annuities may be utilized for long-term care planning. If your children are not as responsible and trustworthy as you desire, then a private annuity may be re-insured by a commercially acceptable annuity company, which would guarantee that the funds will be available regardless of whether your children pay the premiums.

Similarly, a promissory note, which is basically an obligation to pay money back, is in the same category. In this situation, you would loan money to your children, who would pay it back to you, thus converting a countable asset, which otherwise would have been spent on long-term care, to a stream of income that is paid monthly. This lower amount that is paid allows you to qualify for benefits sooner, but in the event of your death, then the balance of the funds will have to be paid back to the state up to the amount that the state paid for your care.

In this situation, it is also a viable option to obtain a commercially sold annuity, which basically covers the promissory note, so in the event that your children do not or cannot pay you back due to financial or personal issues, then the insurance company will make the payments.

In both examples above, you will qualify for Medicaid sooner rather than later and still has some funds available for your personal needs. The private annuity and promissory note are now potentially protected techniques that can allow a Medicaid applicant to attempt to preserve some assets and allow Medicaid benefits to kick in sooner.

Naturally, they are exceptions under the law, and these asset protection techniques must be properly established you will not be approved for Medicaid eligibility.

February 22, 2012

There are several alternatives to paying for college education. In one of the most popular scenarios, a family pays out of pocket from disposable income and if necessary, obtains loans from any governmental sources or possibly from a private resource such a home equity loan on a primary residence.

If the child is young enough, it may be more advisable to start saving money in a better type of savings plan such as a so-called Section 529 Plan or an Education Savings Account (ESA.) There are benefits and detriments of each type of plan, so you must make an intelligent decision about your selection based on family circumstances.

A Section 529 Plan allows funds to be deposited into an account, and so long as the funds are used for education, any income or growth earned on the account is withdrawn tax free. A further benefit is that the beneficiary of the plan may be changed if the initial beneficiary elects not to attend college or perhaps obtains a full scholarship and doesn’t need the money. A substitute beneficiary may be named who may utilize the funds for his or her education.

There are, however, some disadvantages. If the funds are not used for education, then there is a 10% penalty and income taxes will be assessed on the funds that are withdrawn that otherwise would have been withdrawn tax free.

Also, in the 529 plan, the selection of investment vehicles may be limited, as most states have elected only one investment source for the funds, so if a particular investment company is desired, a plan must be obtained within that particular specific advisor.

Also, the transfer of the funds within the 529 plan are limited. There is basically no limit on the amount that can be put in a 529 plan, as a parent may fund the plan as well as a grandparent. Since the gift exclusion on an annual amount is $13,000.00 per year, a significant amount of money may be placed in the 529 plan at any time.

Alternatively, with the ESA, contributions for beneficiaries are subject to a maximum dollar amount, currently $2,000.00 for 2012. This amount is also proposed to be reduced in 2013 and later years at the rate of $500.00. In addition, the ESA contribution is phased out as the donor’s modified adjusted gross income rises. When the single individual has income of $95,000.00 to $110,000.00, the contribution is basically phased out. For married individuals, the limits are $190,000.00 to $220,000.00.

However, these limitations do not apply to 529 plans. Also, in an ESA, in order to maintain the tax advantage, all distributions and funds must be distributed by the age of 30. This is also not the case with a 529 plan, as funds may be continued to be held in the plan for children, grandchildren, or any other beneficiary.

Another choice is to merely have funds placed in a Uniform Transfers to Minors Act Account. In this situation, the funds earn interest, which is taxable and payable at the rate of the child. Subject to the limitations and restrictions of the so-called “kiddie tax,” the funds may have income tax consequences, but the funds are withdrawn after taxes when used for education, since they have already been income taxed. However, based on the particular state law, the Uniform Transfers to Minors Act Account must be withdrawn by the age of 18 or 21, thus the child has unlimited access to the funds at that particular time.

How college savings are held may also affect the child’s ability to obtain financial aid. All of the aforementioned techniques may have a detrimental affect on the ability to obtain aid, but if the funds are available within a family, strong consideration should be made to prefund the education as opposed to relying on financial aid or private funding.

February 08, 2012

There are many unique legal issues to consider relative to the estate planning process for same sex couples, couples who have not decided to get married, and single people. Although many of the planning techniques are similar, since there is no “legal” relationship, special documents must be prepared in many cases.

Naturally, it is important that a Will be given the due consideration in the planning process, but often other required documents are not given as much attention, and they may actually be more important. This “lifetime planning” is relative to your Health Proxy and Power of Attorney, which may allow another person to make decisions for youl upon your incapacity.

Power of Attorney:

Your Power of Attorney is a very important document, since it controls decisions over your finances upon incapacity. Care should be taken to be sure that when a person is named, that individual has business sense, is trustworthy, and also has the time to manage and direct your investments if you cannot do so for yourself. If this document is not prepared, then a conservator will have to be appointed by the Probate Court, and this process often times becomes time consuming, expensive, and emotionally draining.

In this document, a partner or close friend may be named instead of a direct family member. A family member may be displeased with your choice, but once the document is signed, your backup agent is in charge of all financial affairs in the unfortunate event of your incapacity, regardless of your family members’ wishes. Keep in mind though that death revokes the Power of Attorney, and therefore, this document is not used for post-death decisions.

Health Proxy:

Your Health Proxy is also an important consideration. This person may be someone different than the one serving as Power of Attorney, but it should be someone who is close to you and will who carry out your wishes. Within this document, there should also be a backup person named in the event that the primary decision-maker is unable to make decisions due to their own illnesses.

Once again, a family member may be somewhat aggrieved that they are not making these decisions, but it can be written such that the decision maker should consult with a family member, but need not heed their advice when making decisions. Within this document, there should also be language regarding funeral and final disposition arrangements, so that there will be no question as to who is in charge and what will happen. In addition, whether or not you wish to be an organ donor should be included in this document as well as on your license.

Will/Trust:

Needless to say, your Will is also an important document, and you should pay particular attention to who is in charge of your estate as your personal representative. This person will be in charge of making all distributions and decisions, attending to tax matters, and possibly closing your business if your own one. If this person is not able to serve, consider who the backup will be, and if there is no appropriate person, perhaps a bank or trust company can serve in this role.

Within your Will, there may also be a memorandum regarding how specific items of tangible property shall be distributed and to whom. Often, these items are more sentimental than material in value, but they could cause a significant dispute. The objective is to prevent dispute with this document.

If a Trust is to be used, often the named personal representative is also serving as the trustee, with specific instructions as to how your assets should be divided. Again, within this document, it is sometimes anticipated that a family member may not be pleased with the ultimate disposition of your assets, and therefore a specific clause may be included within the document that specifies who your family are and who shall not be a beneficiary under your Trust/Will.

In order to further protect your named beneficiaries, it is often advisable to have a so-called “no contest” clause in the document. This means that if an individual is not satisfied with the amount they are receiving, and if they were to challenge the Will on any grounds, and even if they are successful, they will lose a part of their inheritance, and thus relinquish what otherwise would have passed to them. This clause puts the possible objector in a precarious situation, since they would be forfeiting their distribution in order to attempt to gain more. They must give significant thought regarding whether they wish to challenge the document and forfeit the amount that was left to them prior to moving forward with that case.

Although there are many other considerations, it is important that an unmarried person or members of a same sex couple pay attention to the way assets are held and how they are to be distributed before making a decision to finalize their estate planning documents.